Financial Accounting & Reporting

Partnership
Operation

By: Prof. Ernie D. Tano, CPA, MBA

Acctg. 2

Partnership Operation
Partner’s Equity in Assets vs. Partner’s Share in Profit & Losses

The basis on which profits or losses are shared

is a matter of agreement among the partners
and may not necessarily be the same as their
capital contribution ratio.
Acctg. 2

Partnership Operation
Rules for The Distribution of Profits or Losses

The profit and losses shall be distributed in conformity with the

agreement.

If there is no agreement, the share of each partner in profits or

losses shall be in proportion to what he may have contributed
FAR

Partnership Operation
Illustration 1: Salaries
A and B decided to form a partnership. The partnership agreement
stipulates the following:
- Annual salary allowance of P100,000 for A, the managing partner.
- The partners share in profits and losses on a 60:40 ratio.
Case 1: With remaining profit.
The partnership earned profit of P500,000 before salary allowance.
Requirements:
a. Compute for the respective shares of the partners in the profit
b. Provide the journal entry to close the Income summary account to the partners’
respective equity accounts.
FAR

Partnership Operation
Profit : P500,000
Distribution : Salary P100,000 for A; Balance 60:40 ratio

Requirement (a):

A B Total
Amount being allocated 500,000
Allocation:
1. Salary of A 100,000 - 100,000
2. Allocation of remaining profit
(500K profit – 100K salary) = 400K
(400K x 60%); (400K x 40%) 240,000 160,000 400,000
As allocated: 340,000 160,000 500,000
FAR

Partnership Operation

Requirement (b):

Closing Income Summary 500,000

entry A, Capital 340,000
B, Capital 160,000
Acctg. 2

Partnership Operation
Illustration 1: Salaries
A and B decided to form a partnership. The partnership agreement
stipulates the following:
- Annual salary allowance of P100,000 for A, the managing partner.
- The partners share in profits and losses on a 60:40 ratio.
Case 2: No remaining profit.
The partnership earned profit of P30,000 before salary allowance.
Requirements:
a. Compute for the respective shares of the partners in the profit
b. Provide the journal entry to close the Income summary account to the
partners’ respective equity accounts.
FAR

Partnership Operation
Profit : P30,000
Distribution : Salary P100,000 for A; Balance 60:40 ratio

Requirement (a):

A B Total
Amount being allocated 30,000
Allocation:
1. Salary of A 100,000 - 100,000
2. Allocation of remaining profit
(30K profit – 100K salary) = -70K
(-70K x 60%); (-70K x 40%) (42,000) (28,000) (70,000)
As allocated: 58,000 (28,000) 30,000
FAR

Partnership Operation

Requirement (b):

Closing Income Summary 30,000

entry B, Capital 28,000
A, Capital 58,000
FAR

Partnership Operation
Illustration 2: No P/L ratio
A and B decided to form a partnership on January 1, 20x1. Their capital
contributions were are follows:
Capital accounts
The partnership earned profit of P1,200,000.
A, Capital 100,000
There was no stipulation in the partnership
B, Capital 200,000 agreement on how profits are to be shared by
300,000 the partners.
Requirements:
a. Compute for the respective shares of the partners in the profit
b. Provide the journal entry to close the Income summary account to the partners’
respective equity accounts.
FAR

Partnership Operation
Profit : P1,200,000
Distribution : No agreement

Requirement (a):

A B Total
Amount being allocated 1,200,000
Allocation:
1.2 M x (100K / 300K) 400,000
400,000
1.2 M x (200K / 300K) 800,000 800,000

As allocated: 400,000 800,000 1,200,000

FAR

Partnership Operation

Requirement (b):

Closing Income Summary 1,200,000

entry A, Capital 400,000
B, Capital 800,000
FAR

Partnership Operation
Illustration 3: Bonus
A and B decided to form a partnership. The partnership agreement
stipulates the following:
- Annual salary allowance of P100,000 for A and P40,000 for B.
- Bonus to A of 10% of the profit after partners’ salaries but before
deducting the bonus.
- The partners share in profits and losses on a 60:40 ratio.
Case 1: Profit.
The partnership earned profit of P500,000.
Requirements:
a. Compute for the respective shares of the partners in the profit
FAR

Partnership Operation
Profit : P500,000
Distribution : Salary P100,000 for A & P40,000 for B; Bonus to A 10% of profit after partners’
salaries but before deducting bonus. Balance 60:40 ratio
Requirement (a):

A B Total
Amount being allocated 500,000
Allocation:
1. Salary of A 100,000 40,000 140,000
2. Bonus 36,000 36,000
3. Allocation of remaining profit

(500K – 140K – 36K) = 324K

(324K x 60%); (324K x 40%) 194,400 129,600 324,000
As allocated: 330,400 169,600 500,000
FAR

Partnership Operation
Profit : P500,000
Distribution : Salary P100,000 for A & P40,000 for B; Bonus to A 10% of profit after partners’
salaries but before deducting bonus. Balance 60:40 ratio

The bonus is computed as follows:

Profit before salaries & bonus 500,000

Salaries (140,000)
Profit after salaries but before deduction of bonus 360,000
Multiply by: Bonus percentage 10%
Bonus 36,000
FAR

Partnership Operation
Illustration 3: Bonus
A and B decided to form a partnership. The partnership agreement
stipulates the following:
- Annual salary allowance of P100,000 for A and P40,000 for B.
- Bonus to A of 10% of the profit after partners’ salaries but before
deducting the bonus.
- The partners share in profits and losses on a 60:40 ratio.
Case 2: Loss.
The partnership incurred loss of P20,000
Requirements:
a. Compute for the respective shares of the partners in the profit
Partnership Operation
FAR

Loss : P20,000
Distribution : Salary P100,000 for A & P40,000 for B; Bonus to A 10% of profit after partners’
salaries but before deducting bonus. Balance 60:40 ratio
Requirement (a):

A B Total
Amount being allocated (20,000)
Allocation:
1. Salary of A 100,000 40,000 140,000
2. Bonus - -
3. Allocation of remaining loss
(-20K – 140K) = -160K
(-160K x 60%); (-160K x 40%) (96,000) (64,000) (160,000)
As allocated: 4,000 (24,000) (20,000)
FAR

Partnership Operation

Requirement (b):

Closing B, Capital 24,000

entry A, Capital 4,000
Income Summary 20,000
FAR

Partnership Operation
Illustration 4: Bonus – With limit
A and B decided to form a partnership. The partnership agreement
stipulates the following:
- First, A shall receive 10% of profit up to P100,000 and 20% over
P100,000.
- Second, B shall receive 5% of the remaining profit over P150,000.
- Any remainder shall be shared equally.
During the year, the partnership earned profit of P280,000
Requirements:
a. Compute for the respective shares of the partners in the profit
Partnership Operation
FAR

Loss : P280,000
Distribution : Bonus: A = 10% of profit up to P100,000 and 20% over P200,000; B = 5% of the
remaining profit over P150,000. Balance shared equally.
Requirement (a):

A B Total
Amount being allocated 280,000
Allocation:
1. Bonus to A First 100K: (100K x 10%) 10,000 10,000
Over 100K: [(280K-100K) x 20%)] 36,000 36,000
2. Bonus to B (280K - 10K - 36K - 150K) x 5% 4,200 4,200
3. Allocation of remaining profit
(280K - 10K - 36K – 4.2K) ÷ 2 114,900 114,900 229,800
As allocated: 160,900 119,100 280,000
FAR

Partnership Operation
Illustration 5: Interest on capital
A and B decided to form a partnership. The partnership agreement
stipulates the following:
- Annual salary allowance of P100,000 for B, Capital
A, the managing partner. 50,000 Beg.
- Interest of 10% on the weighted Jul 1 20,000 40,000 Sep 30 Additional
average capital balance of B. withdrawal investment
- The partners share in profits and losses 30,000 Dec 31 Additional
investment
on 60:40 ratio.
End. 100,00
the partnership earned profit of P500,000 0
Requirements:
a. Compute for the respective shares of the partners in the profit
Partnership Operation
FAR

Solution: The interest on the weighted average

capital balance of B is computed as
follows:

Balances Months outstanding ÷ Weighted

Total months/year Average

Beg. balance 50,000 12/12 50,000

Jul 1 w’drawal (20,000) 6/12 (10,000)
Sep 30 investment 40,000 3/12 10,000
Dec 31 investment 30,000 0/12 -
Wtd. Ave. Cap. Bal. 50,000
X interest rate 10%
Interest on Wtd Ave Cap bal. 5,000
FAR
Partnership Operation
Profit : P500,000
Distribution : Salary P100,000 for A; Interest of 10% on the weighted average capital.
Balance 60:40 ratio

Requirement (a):
A B Total
Amount being allocated 500,000
Allocation:
1. Salary of A 100,000 100,000
2. Interest on weighted ave. capital 5,000 5,000
3. Allocation of remaining profit
(500K – 100K – 5K) = 395K
(395K x 60%); (395K x 40%) 237,000 158,000 395,000
As allocated: 337,000 163,000 500,000
FAR

Partnership Operation
Illustration 6: Profit after salaries
A and B decided to form a partnership. The partnership agreement
stipulates the following:
- Annual salary allowances of P100,000 for A and P40,000 for B. The
salaries are recognized as expenses.
- The partners share in profits and losses on a 60:40 ratio.
The partnership earned profit of P360,000

Requirements:
a. Compute for the respective shares of the partners in the profit
FAR

Partnership Operation
Profit : P360,000
Distribution : Salary P100,000 for A & P40,000 for B (are recognized as expenses);. Balance
60:40 ratio

Solution:

“Salaries are recognized as

expenses” means that the
Profit (after deduction of salaries 360,000
profit given in the problem
is already net of the Add back: Salaries (100K + 40K) 140,000
partner’s salaries. The first Profit before salaries (Amount to be 500,000
step is to determine first the allocated)
profit before deduction of
the salaries.:
FAR

Partnership Operation
Profit : P500,000
Distribution : Salary P100,000 for A & P40,000 for B (are recognized as expenses);.
Balance 60:40 ratio
Requirement (a):
A B Total
Amount being allocated 500,000
Allocation:
1. Salary of A 100,000 40,000 140,000
2. Allocation of remaining profit
(500K profit – 140K salary) = 360K
(360K x 60%); (360K x 40%) 216,000 144,000 360,000
As allocated: 316,000 184,000 500,000
FAR

Partnership Operation
Illustration 7: Reconstruction of information
Partner A has a 25% participation in the profits of a partnership. During
the year, A’s capital account has a net increase of P10,000. Partner A
made contributions of P40,000 and capital withdrawals of P60,000 during
the year:
Requirements:
How much profit did the partnership earn during the year?
FAR

Partnership Operation
Requirements:
How much profit did the partnership earn during the year?
Solution:
Step 1: We will place the given information on the T-account.
A, Capital
-* Beg.
withdrawal 60,000 40,000 Additional investment
? Share in profit (squeeze)
End. 10,000*
FAR

Partnership Operation
Step 2: We will squeeze for the missing amount.
A, Capital
- Beg.
withdrawal 60,000 40,000 Additional investment
30,000 Share in profit (squeeze)
End. 10,000

Step 3: We will squeeze for the requirement of the problem

Partnership profit 120,000
? P30,000 ÷ 25%
Multiply by: P/L % of A 25%
A’s share in profit 30,000 Start (amount from T-account)
FAR

Partnership Operation
Illustration 8: Reconstruction of information
A and B decided to form a partnership. The partnership agreement
stipulates the following:
- Annual salary allowances of P100,000 for A, the managing partner
- The partners share in profits and losses on a 60:40 ratio.

Requirements:
If A’s share in the partnership profit was P340,000, how much was the share of B?
FAR

Partnership Operation
Requirements:
If A’s share in the partnership profit was P340,000, how much was the
share of B?
Solution:
Step 1: Place the given information on the pro forma table.
A B Total
Amount being allocated ?
Allocation:
1. Salary of A 100,000 - 100,000
2. Allocation of remaining profit ? ? ?
As allocated: 340,000 ? ?
FAR

Partnership Operation
Requirements:
If A’s share in the partnership profit was P340,000, how much was the
share of B?
Solution:
Step 2: Identify the next most obvious amount that you can derive.
A B Total
Amount being allocated ?
Allocation:
1. Salary of A 100,000 - 100,000
2. Allocation of remaining profit ? ? ?
As allocated: 340,000 ? ?
FAR

Partnership Operation
Requirements:
If A’s share in the partnership profit was P340,000, how much was the
share of B?
Solution:
Step 3: Compute for the “Allocation of remaining profit” of A
A B Total
Amount being allocated ?
Allocation:
1. Salary of A 100,000 - 100,000
2. Allocation of remaining profit ?
240,000 ? ?
As allocated: 340,000 ? ?
FAR

Partnership Operation
Requirements:
If A’s share in the partnership profit was P340,000, how much was the
share of B?
Solution:
Step 4: Analyze again. Identify the next most obvious amount you can derive
A B Total
Amount being allocated ?
Allocation:
1. Salary of A 100,000 - 100,000
2. Allocation of remaining profit ?
240,000 ? ?
As allocated: 340,000 ? ?
FAR

Partnership Operation
Requirements:
If A’s share in the partnership profit was P340,000, how much was the
share of B?
(*240,000 ÷ 60% P/L share of A) = 400,000
Solution:
Step 5: Compute for the total amount “Allocation of remaining profit”
A B Total
Amount being allocated ?
Allocation:
1. Salary of A 100,000 - 100,000
2. Allocation of remaining profit ?
240,000 ? ?
400,000*
As allocated: 340,000 ? ?
FAR

Partnership Operation
Requirements:
If A’s share in the partnership profit was P340,000, how much was the
share of B?
Solution:
Step 5: Compute for the total amount “Allocation of remaining profit”
A B Total
Amount being allocated ?
500,000
Allocation:
1. Salary of A 100,000 - 100,000
2. Allocation of remaining profit 240,000
? ?
160,000 ?
400,000
As allocated: 340,000 ?
160,000 ?
500,000
FAR

Partnership Operation
Illustration 9: P/L ratio in fractions
The ABC Co., on which A, B and C are partners, reported profit of P90,000
during the year. Partners A, B and C have a profit sharing agreement of
2:3:4, respectively.
Requirements:
How much are the partners’ respective shares in the profit?
Partners Allocation of profit
A 90,000 x 2/9 20,000
B 90,000 x 3/9 30,000
C 90,000 x 4/9 40,000
Total 90,000
FAR

Partnership Operation
Special Case: Bonus
Under partnership agreement, Partner A is to receive a bonus of 20% of net income
after bonus and the remainder is to be distributed as follows: A 35%, B 35% & C 30%.
Net income is P3,180,000
Requirements:
How much is the bonus of Partner A?
Bonus = 20% of Net Income after bonus B+.20B = P636,000
B = .20 (NI –B) 1.20 B = P636,000
B = .20 (P3,180,000 – B) 1.20 B ÷ 1.20 = P636,000 ÷ 1.20
B = P636,000 - .20B B = P530,000
End of Presentation.
Reference:

Financial Accounting & Reporting

(fundamental, 3rd Edition 2020 by Zeus Vernon B.
Millan